Close ties with arbitrator can unbind decision

Prudential fired Alex Montez four months into his job as a senior vice president after it found he had misrepresented something on his job application. But one issue prevented a clean break, Montez had taken a $270,000 loan from the company and he objected to Prudential's request that the money be repaid immediately, with interest.

Based on an arbitration provision in Montez's employment agreement, the dispute went to a panel of three arbitrators who ultimately ruled in Prudential's favor. Montez cried foul, however, because one of the arbitrators had ties to the law firm that represented Prudential.

A federal appeals court refused to throw out the decision, however. The arbitrator's relationship with the law firm ended five years before the Prudential case, and the arbitrators didn't have anything to gain by courting a relationship with either company.

The court, however, did say that it's possible for an arbitrator's bias to unravel a decision and that courts have had trouble delineating just what level of relationship is impermissible. (Montez v. Prudential Securities Inc., No. 00-3957, 8th Cir., 2001)

Advice: It's natural to select arbitrators that you know. But if you pick somebody too close, such as someone with a financial interest at stake, the results of the arbitration can be thrown out, wasting a lot of time and money.

To make sure the dispute resolution you paid for is effective, you and your lawyer should scrutinize current or prior connections with the arbitrators. A past financial relationship does not necessarily disqualify an arbitrator, but a current relationship, even through counsel, might. Refer to the rules of the arbitration for your obligation to disclose these relationships to your opponent.

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